Did rural distress impact India’s Lok Sabha election results?

The farm sector gross value added (GVA) was seen slowing down to 1.4 percent in FY24.

Rural distress – in the form of low private consumption, anaemic agricultural growth, food inflation and increasing demand for work under a job guarantee scheme – has been cited as one reason the Bharatiya Janata Party lost seats in the state of Uttar Pradesh in the 2024 Lok Sabha elections.

What are the rural red flags that Modi 3.0 will have to address? Data shows a slowdown in average agriculture growth and high food prices. According to experts, the government will have to set aside additional funds for rural jobs and subsidies and increase public investment in the agricultural sector.

The BJP-led National Democratic Alliance won 221 rural and semi-rural Lok Sabha constituencies in the just-concluded election compared with 251 rural and semi-rural constituencies in 2019. The INDIA bloc won 157 rural and semi-rural constituencies in the 2024 election.

There were signs of stress in the most recent economic data. While India’s provisional GDP grew 8.2 percent in FY24, thanks to the manufacturing and mining sectors, expansion in gross value added (GVA) in the farm sector slowed to 1.4 percent from 4.7 percent in FY23.

“What explains such a large difference between GVA and GDP? Most likely the government might have not spent on the subsidies while tax flows, especially GST, have been highly robust,” explained Amol Agrawal, a professor at Ahmedabad University.

According to DK Srivastava, chief policy advisor at Ernst and Young, issues such as food inflation and rural distress were possibly ignored, and the government may now have to balance fiscal discipline vis-a-vis growth.

“India will have to increase subsidies’ allocation. Rural distress has two dimensions, it has been acute in the current year and last year. While average agriculture growth is usually at 3 percent, in 2023-24 it was only 1.4 percent, coupled with high food inflation. In February-April, average food inflation was at 8.6 percent, and vegetable inflation was even higher,” Srivastava told Moneycontrol on June 4.

While GDP growth at 7.8 percent in Q4 has been very strong, the laggards were the agriculture sector and private consumption. In January-March 2024, the farm sector grew 0.6 percent compared with 0.4 percent in October-December.

Rural demand indicators

According to the Household Consumer Expenditure Survey, per capita monthly consumption in the rural areas was 40 percent higher at Rs 2,008, after adjusting for inflation in FY23. Sales data for products that are mostly consumed in rural India showed a tepid rural demand scenario in FY24.

Tractor sales in the local market fell 8 percent in FY24, according to data from Tractor Junction, an online aggregator for farm equipment. Two-wheeler manufacturers Bajaj Auto, Hero MotoCorp and Eicher Motors reported a decline of 1-8 percent in domestic sales in May from a year earlier.

The FMCG sector was also hit by weak sentiment in the rural sector. Hindustan Unilever reported a 6 percent fall in standalone net profit in the fourth quarter.

Private consumption increased 4 percent in FY24, a 20-year low. The share of private consumption in GDP in the March 2024 quarter was the lowest since the March 2010 quarter.

Demand for work under the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) rose 48.8 percent in April with 30.2 million people seeking jobs, according to data from the ministry of rural development.

“Sequentially, the demand for work under MGNREGA increased sharply by 48.8 percent in April,” the National Council of Applied Economic Research (NCAER) monthly economic review said in its report in May.

However, the budget allocation for the scheme was unchanged at Rs 86,000 crore for FY25. The allocation was Rs 61,500 crore in FY21 and remained constant at Rs 73,000 crore in FY22 and FY23.

“Rural distress has not been receiving adequate attention from policymakers. MGNREGA and subsidy allocations have been coming down in the last 2-3 years. This requires analysis and necessary adjustments by policymakers,” Srivastava said.

The World Bank said in October 2023 that real rural wages in India have stagnated for a decade while the MGNREGA data suggests rural distress.

Food inflation

High food inflation last year led the government to implement frequent measures to arrest the price rise in staples ranging from onions to rice, which on the other hand, fuelled concerns over New Delhi’s intent to enhance the income of farmers, a key vote bank.

Onion prices touched an all-India average rate of Rs 55.12 per kg in December 2023. The government brought down prices of rice to Rs 2,900 per quintal in 2023 from Rs 3,100 per quintal. Rice inflation stood at 13 percent year-on-year in December 2023.

India’s headline retail inflation touched a 15-month high of 7.44 percent in July 2023, driven by a surge in the prices of vegetables and staples such as cereals and pulses. A fall in prices of onions and tomatoes following the government’s decision to intervene in the market stopped farmers from getting the benefit of a rise in prices.

Rural economy

GST collections per person reflect the intensity of consumption in a state. Uttar Pradesh ranked second nationally in total GST collections, but on a per capita basis, the state was placed 16.

Poor agricultural performance and high food inflation in FY24 ate into the purchasing power of people, leading to a slowdown in private consumption.

“Gross capital formation in the agricultural sector needs to be strengthened to tackle the agrarian distress. Enhancing public investment in the agricultural sector will have a relatively better outcome than targeted cash transfers. The cost and access to credit needs equal attention. Intervening in the markets through price mechanisms may not result in the desired outcome,” Lekha Chakraborty, a professor at the National Institute of Public Finance and Policy, told Moneycontrol.